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Minters flags class action short-selling in submission to Inquiry

Minters flags class action short-selling in submission to Inquiry

Red flag

MinterEllison has called for a better look into the issue of short-selling in a class action content, in another submission to the Australian Law Reform Commission Inquiry into class actions and third-party litigation funders.

Minters has lodged a further submission to the ALRC Inquiry into Class Action Proceedings and Third-Party Litigation Funders, saying a look into the appropriateness of short sellers’ participation in shareholder class actions is necessary.

“No Australian court has examined the issue of short selling in a class action context,” said David Taylor, MinterEllison partner and class actions specialist.

“Short-sellers regularly profit from share price declines, and then make claims for compensation as participants in a class action. Certain courts in the US have therefore denied short-sellers the right to participate in class actions.

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“Short-sellers, here and in the US, contend that they should be able to participate as class members. Our view is that short-seller’s attempts to, effectively, ‘double-dip’, have the potential to cause an injustice to the companies being sued, but also to traditional investors participating in class actions.

“As well as the appropriateness of short-sellers potentially benefiting twice from the share price decline, from MinterEllison’s perspective, there is a key question as to whether short sellers should be allowed to rely on the class action mechanism of market-based reliance to claim loss.”

To further his point, Mr Taylor claimed short sellers “may in fact be betting on the market getting it wrong, rather than relying on the market to accurately price the security”.

“They should not be entitled to rely on an assumption, therefore, that a company’s share price has been accurately set by a market which possesses all material information about the company,” he said.

Beverley Newbold, head of MinterEllison’s national class action practice, offered a similar sentiment, noting that the participation of short sellers in class actions is “well-known” to litigation funders and to law firms that practise in this area.

“The entitlement of short-sellers to participate will often be canvassed in confidential settlement discussions between litigation funders and law firms. However, there has been no public discussion of short-sellers’ alleged entitlement to participate, nor of how consistent their participation is with the objectives of Australia’s continuous disclosure and shareholder class action regimes,” Ms Newbold said.

“Close scrutiny should be given to this issue in any proposed continuous disclosure review.”

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